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Are You Ready For Your MBO?

So, you are currently working in a management role, but with no, or minimal, shareholding in the business and you believe that the current owner is thinking about retirement or perhaps going off to do something else altogether. Suddenly, you may have the opportunity to buy the business and have the potential to benefit from all your hard work and those great, new, business ideas you have been harbouring. It sounds to me like you have a chance to do a management buy out (MBO).

Where to start?

The first step can often be the hardest to take. You must raise the matter sensitively with the owner and how you do this will depend on your relationship with him or her. What you mustn’t do is kick anything off behind the owner’s back, as this may be upsetting as well as possibly being in breach of your contract of employment. You need the owner on your side. Assuming you get the green light, who will be in your team? Whoever it is must be 100% committed and understand the risks and rewards associated with being a business owner. Each team member will be asked to invest some capital personally and may also have to sign up to guarantees. You must suss out who is up for this. You don’t want anyone pulling out part way through because that would be very disruptive. Importantly, your team must be complete and cover all the bases; management, sales, production and finance. Finance is particularly critical. MBOs often require a significant level of debt and operating in this environment may require a change in emphasis to focus on cash flow, margin and cost control as well as the all-important sales figures.

Plan early

You will need a robust business plan so the sooner you can get cracking on this the better. Your MBO will more than likely need financial backing from one, or perhaps more, lenders or investors. They need to understand the business, believe that you and your team can deliver your growth plans and see how they can make a return.

Choose your advisers

You will need a corporate finance adviser. Don’t go for cheap. Don’t be tempted to go with the current company accountants as they will almost certainly advise the existing owner and thus have a conflict of interest. Choose an experienced adviser who has a track record in completing MBOs. Importantly, choose an adviser you can get on well with if the going gets tough.

Spring clean the business

Work with the owner and your advisers to tidy up before you start talking to funders. They will subject the business and your plans to detailed due diligence so you don’t really want any surprises.

Choose your financial backers

Your financial backers will be an integral part of your business life for at least 3 years and perhaps more. You need to choose those who you can rely on for support. Hopefully, things will all go according to plan, but if they don’t, having a supportive and flexible backer will be crucial. Your corporate finance adviser will know who to approach and what they want to hear.